Radical shake-up of overdraft charges will restrict fees

Fixed fees for overdrafts will be banned under reforms announced by the financial regulator.

The Financial Conduct Authority (FCA) has described its new rules as the “biggest overhaul of the market in a generation”.

Fixed fees for borrowing through an overdraft will be banned and banks and building societies will have to price overdrafts by a simple annual interest rate.

Banks and building societies will no longer be able to charge more for unarranged overdrafts than they do for arranged overdrafts.

They will also have to do more to identify customers who are showing signs of financial strain and be prepared to help reduce repeated overdraft use.

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In 2017, firms made more than £2.4bn from overdrafts, with around 30% from unarranged overdrafts.

More than half of banks’ unarranged overdraft fees came from just 1.5% of customers in 2016, many of them vulnerable and living in deprived areas.

Christopher Woolard, the FCA’s executive director of strategy and competition, said the new rules are the “biggest overhaul of the overdrafts market we’ve seen in a generation”.

He told Sky News: “This is a dysfunctional market at the moment and we want to make it easier and clearer and fairer for people to use overdrafts.”

He said that current charges for borrowing £100 through an unarranged overdraft could be around £5 a day but “in future we think it should cost around 20p”.

Fees for unarranged overdrafts can be more than 10 times as high as fees for payday loans, the FCA has said.

But Mr Woolard ruled out the possibility of compensation for those who have been paying such overdraft fees for years.

He said: “[The new rules are] a forward-looking measure, there is no suggestion in any of the work that we’ve done that banks or others had broken the rules that existed at the time.”

Some of the changes will come into effect immediately, such as the guidance on refused payment fees.

Others will take “a little bit of time”, Mr Woolard said, adding that the full range of measures should be in place by April next year.

“There are changes banks will need to make with their systems and how they interact with their customers, so this is going to take time to get it right.”

Citizens Advice supported 24,000 people struggling to repay overdrafts last year – two in five of them had a disability or long-term health condition and one in four were single parents, it said.

Gillian Guy, chief executive of Citizens Advice, said the rules should help prevent customers “getting trapped in a debt spiral” while MoneySuperMarket’s Emma Craig said the FCA’s intervention was “long overdue”.

Eric Leenders, managing director – personal finance at trade association UK Finance, said it would be “working closely with the FCA” to implement the rules.

“The industry is working on a voluntary agreement to make the cost of overdraft borrowing easier to understand for consumers which is due to be implemented in April 2020. This will build on the range of measures already introduced by the industry, such as text alerts which have been shown to reduce overdraft charges by 25%.

“Overdrafts can provide a convenient way for customers to smooth their short-term cashflow, and there is a highly competitive market in the UK with over 96 products on offer.

“We would always urge customers to speak to their bank and arrange an overdraft in advance to ensure payments are honoured.”

(c) Sky News 2019: Radical shake-up of overdraft charges will restrict fees